Portfolio Manager Insights

Fed policy may keep leveraged-loan yields high

If the economy continues to grow and tariffs drive prices higher, the Federal Reserve is unlikely to pursue aggressive rate cuts, which could create a supportive environment for leveraged loans, says Fidelity’s Eric Mollenhauer.

By: Eric Mollenhauer
Updated: 8/25/2025
  • Policy priorities of the current administration and the Fed’s reticence to cut interest rates may help to keep leveraged-loan base rates and yields relatively high for some time, according to Fidelity Portfolio Manager Eric Mollenhauer, who says loans offer an attractive yield compared with other income-oriented investments.
  • “Although we can’t predict the direction of interest rates, we believe the base rate for loans could remain elevated,” says Mollenhauer, who co-manages Fidelity Advisor® Floating Rate High Income Fund with Kevin Nielsen and Chandler Perine.
  • The fund is a diversified leveraged-loan strategy focused primarily on loans that banks have made to non-investment-grade companies. Employing a core investment approach, the managers seek companies they believe have strong franchises and assets, adequate liquidity, operating flexibility and a solid management team.
  • With the yield on the Morningstar LSTA US Performing Loan Index hovering above 8% as of June 30, Mollenhauer believes loans remain an appealing investment option, even if the Fed were to cut rates a few more times.
  • “Given their leverage, the companies we lend to generally perform better when the economy is growing, even at a lower rate like today,” he explains. “Fewer Fed rate cuts should keep the base rate for loans relatively high, in our view.”
  • Longer term, Mollenhauer thinks the trend may be for short-term rates to remain elevated compared with the historical average. Key indicators the managers monitor – such as the interest-rate swap curve for the Secured Overnight Financing Rate (SOFR) – also reflect this expectation, he says.
  • Leveraged-loan yields consist of a base rate derived primarily from SOFR plus a spread above that rate. As of June 30, the base rate was about 4.3% and the spread was roughly 4.1 percentage points.
  • “In light of ongoing negotiations with major U.S. trading partners, market volatility is likely to continue,” Mollenhauer says. “Still, given our long-term focus, market pullbacks give us the opportunity to buy loans we like at a lower price. Whatever challenges the market presents in 2025, we’ll remain vigilant in our credit selection, emphasizing what we consider to be our research team’s best ideas.”
 
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Fixed income Interest rates Leveraged loans Market volatility
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